The FT’s decline

By Felix Salmon

March 6, 2011

told me that the latest numbers for digital subscribers show that I was wrong when I criticized the FT's strategy in October 2007.
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I had a hard-to-follow Twitter debate yesterday about the FT’s paywall, where a couple of FT types — Alan Beattie and John Gapper — told me that the latest numbers for digital subscribers show that I was wrong when I criticized the FT’s strategy in October 2007. I’m often wrong, so that wouldn’t come as a surprise. But in this case I think I was right.

Because the FT is a subsidiary of a much larger corporation, it can confine itself to releasing only the numbers it wants to release. But a few things are clear at this point.

Firstly, the success of the website — if indeed it is a success — has not helped stop the bleeding in terms of print subscribers. Daily print circulation was 485,000 at the end of 2000, and dropped at a rate of about 5,000 a year to 440,000 at the end of 2008. The rate of decline has accelerated sharply since then: print circulation is now 390,000, which means the paper has been losing around 25,000 print subscribers per year over the past couple of years.

The good news is that digital subscribers have been arriving more quickly than print subscribers have been leaving. In the past year alone, the digital subscriber base has risen from 121,000 to 207,000 — an increase of 86,000 people, all of whom are paying print-like subscription rates.

Exactly what those rates are is not easy to determine. FT.com managing director Rob Grimshaw told me a couple of years ago that he loved the kind of airline pricing models where someone who paid $45 for their ticket can be sitting next to someone who paid $945 for the same service. So there’s a lot of opacity built in to the system. But I can tell you a few different rates.

Here in New York, if I lock myself in to an annual subscription, the FT will give me website access (including mobile and iPad) for $259 per year, or “premium” website access, including the Lex column and a couple of other bells and whistles, for $389 per year. If I want the physical newspaper delivered as well, that costs $440 per year. If I sign up monthly rather than annually, the minimum cost for the website is $312 per year, with premium access at $468 and the combined print-and-online subscription at $528. The newspaper-only subscription, with no website access, is annual only, at $348.

All of these numbers are significantly lower than they are in the UK, where a basic web subscription is $380 pear year, the premium subscription is $549, and the combined paper-and-online subscription is $845.

There are a few messages being sent here. Firstly, the FT is taking full advantage of its quasi-monopolistic status among UK consumers who are not particularly price-sensitive to charge very high subscription rates there. But it’s keeping its US rates lower because it’s still having difficulty breaking into this market. Secondly, the FT charges a significant premium if you subscribe monthly rather than annually — which says to me that monthly subscribers have tendencies to disloyalty and letting their subscriptions lapse. And finally, the FT is happy to sell a physical newspaper subscription for less than the price of accessing the same content (including the Lex column) online — indeed, the newspaper-only subscription cost is probably less than the cost to the FT of printing and distributing the physical newspaper six days a week.

While the FT loves to tout its combined subscriber base, then, it’s clearly following two different models at once. The newspaper business is the same as it ever was: lose money on printing and distributing the physical product, but make it all up with ad revenues. The online business, by contrast, is all about the subscription revenues, with ad sales being much less important. Gapper goes as far as to say that 207,000 digital subscribers could actually be worth more to the FT than 20 million unique visitors.

Conceptually, what the FT is doing here is holding onto the ad-supported model for as long as it can, while moving aggressively to a newsletter model for the online product. And the problem here is that while newsletters can be profitable, they’re never important*, and they never go viral: they cut themselves off from substantially the enormous world of opportunity afforded by being online. Successful websites get that way because people share them, with their friends and colleagues and Twitter followers — every reader is also a potential content distributor. Under the FT model, by contrast, the FT itself is at pains to be the only content distributor, and tells readers redistributing its content in incredibly natural ways that they are copyright infringers and in violation of the site’s terms and conditions.

Gapper reckons that the newsletter model means higher cashflow, higher CPMs, lower volatility, and higher p/e ratings. I’m pretty sure he’s wrong on the p/e front: there’s no way that the FT is worth anything like the multiples we’re seeing in the online-content space, whether you look at price-to-earnings, price-to-revenues, or any other ratio.

As for the other metrics, cashflow and low volatility are nice things to have, but massive growth is nicer. And for a news organization which aspires to grow from its UK base to become a genuinely global brand, it’s crucial. The FT’s paywall is structured very aggressively — you have to register after reading just one article per month, and then unless you subscribe you’re cut off after 10 articles per month. That’s good at maximizing short-term cashflow, but it clearly hurts growth: the FT doesn’t release numbers for unique visitors, but both Quantcast and Compete show FT uniques falling significantly over the past year, and actually being overtaken by Business Insider. What I said back in 2007 was that the FT was removing itself from the conversation; that’s exactly what seems to have happened.

I don’t doubt for a minute that the FT’s CPMs are very high. But they’re getting there the wrong way, by minimizing the Ms (the number of pageviews) rather than maximizing the Cs (total ad revenues). Eventually, the FT is going to be such a niche product, compared to other business and finance publications, that global B2B advertisers simply won’t see the point in buying it any more. What it should be doing is becoming so big and important outside the UK that major advertisers feel the need to buy it even if they have no desire at all to reach the UK audience. But it’s nowhere near that point yet, and it doesn’t seem to be getting there, either.

And if the FT isn’t serving advertisers well, it’s not doing so well for readers, either. Paywalls should always be completely invisible to subscribers, but the FT’s fails miserably on that front: subscribers keep on running into that wall on a regular basis, especially when they try to visit ft.com from their mobile device, or when they try to follow a link sent to them by a non-subscriber.

Meanwhile, it’s not just the cost of a subscription which is opaque — the broader FT franchise seems set up to make no readers at all happy with what they’re getting.

Let’s say, for instance, that you’re very interested in China. There’s China content in the FT, of course, which will cost you a few hundred dollars a year to read. If you want wonkier and more in-depth material, a great place to look is FT Alphaville, which regularly takes FT content and then adds very sophisticated analysis and data. Confusingly, Alphaville content is free. And then there’s the Long Room, an elite forum for financial professionals to discuss such matters: that’s free, too. Over to the side, there’s also FT Tilt. That has its own proprietary China content for which it charges thousands of dollars, alongside contributed content which is free with registration. And finally there’s China Confidential, a newsletter which comes out every couple of weeks or so, costs even more than FT Tilt, and which has recently launched a spin-off called China Confidential Funds which doubtless costs more still.

The whole structure feels a bit like Scientology: every time you reach one level, you realize there’s another, more expensive level awaiting you. The China story is of course absolutely central to the FT’s mission of explaining global business and economics — but instead of corralling its resources and creating the best coverage for its readers that it can possibly put together, it balkanizes those resources and has one group of people writing for the paper, another for Alphavile, a third for Tilt, a fourth for China Confidential, and a fifth for China Confidential Funds. From a sheer journalistic-quality perspective, this can’t possibly make sense. And it’s not like there’s a strong correlation between the price of the products and the quality of the journalists, either. It’s really just a mess, a desperate scrabble for revenues from a company which ought to be building the best unified global business coverage it can.

Overall, the FT strategy is exactly the strategy I would choose if I was faced with an industry in terminal decline, and wanted to extract as much money as possible from it before it died. And that’s sad, because the FT can and should be a major global player in perpetuity. Pearson should sell it now, to someone who can invest in it and make it relevant to a fast-growing business audience worldwide. If Pearson fails to do so, the annual decline in the value of the FT franchise will always exceed the dividend that Pearson manages to extract from it.

*Update: I’m getting pushback on this one bit in particular, where I said that newsletters are never important. They can be important within small, specialized groups or industries. But they’re never important to a general audience, or even a general business audience: they only become important when they start targeting very narrow groups like private-equity general partners or hedge fund prime brokers.

Update 2: Gapper responds. He talks about earnings growth at the FT Group as though it proves something — but it doesn’t, because that says nothing about earnings growth at the FT. (One would expect FT Group earnings to be increasing, if only because Pearson keeps on adding things like Medley Global Advisors to the group.)

More to the point, Gapper seems to have convinced himself that the FT’s high CPMs are entirely a function of its paywall, rather than a function of who its readers are. He compares revenues at the FT to those at the Guardian and at Gawker Media (!), and on that basis decides that the FT could never make an ad-supported model work. But of course the FT could still charge very high CPMs even if it was free, they would never come down to general-interest levels.

Gapper seems to think that I said that ad revenues from 20 million unique visitors would exceed subscription revenues from 207,000 subscribers. I never said that. But, pace Gapper, let’s do the math. He seems to think that Gawker Media is a good example of a site with 20 million uniques, so let’s use that as our example: it gets about 300m pageviews a month — 3.6 billion pageviews per year — from its 20m US visitors.

Gapper’s estimate for FT digital subscription revenues is $52 million per year. In order to get $52 million from 3.6 billion pageviews, you’d need revenue per 1,000 pages of about $14. Let’s say you have two ad units per page, and you can sell two-thirds of your inventory. Then in order for your ad revenues to exceed $52 million, you’d need CPMs of about $10 on average. I’m sure the FT can charge much more than that.

Meanwhile, the value of the FT itself is surely much greater with 20 million global readers than it is with 3 million — after all, the media business is all about building as large an audience as possible. Yes, it’s nice to have a diversified revenue stream, which is why Pearson owns lots of subscription-based products and is buying more. But that doesn’t mean the FT itself has to move aggressively away from advertising and towards subscriptions.